In many typical credit-card transactions, a consumer purchases a product or service from a merchant using a VISA®- or MasterCard®-branded credit card. To complete the transaction, the merchant receives an authorization from a third party, known as a “merchant processor,” which is sponsored by a VISA®- or MasterCard®-member bank. Merchants typically select a merchant processor to install point-of-sale equipment, train the merchant's staff in the use of the equipment, access the credit-card network for authorizations, and process the merchant's credit-card transactions.
The merchant processor, through its sponsoring bank, reimburses the merchant for each transaction after deducting transaction fees retained by the merchant processor. Within these transaction fees are the merchant processor's processing fee, the interchange fees paid to the issuer of the credit card, and the assessment fees that are paid to the credit-card association. The merchant processor submits the net transaction into the card association's settlement network in order to be reimbursed by the issuing bank. The VISA® and MasterCard® associations are responsible for building, operating, maintaining, authorizing, and providing the information required for the member banks to settle their net transaction volume. Each association receives an assessment fee from both the merchant processor's bank and the issuer's bank for each credit-card transaction processed through their respective network. The issuer in turn bills the consumer the full amount of the original charge.
The interchange fees charged merchants by the card issuers can be quite expensive—currently billions of dollars a year worldwide. Unfortunately, the interchange categories used to determine these fees are difficult to understand and track, resulting in merchants paying much more than they should, either by not knowing how to change to less-expensive interchange categories or by being incorrectly assigned to expensive interchange categories.
These interchange categories are difficult to understand and track in part because there are so many different kinds. Some are based on the merchant's retail industry status, some on the type of card presented for payment, and some on the process used by the merchant to gain authorization for the transaction. For example, interchange categories (and thus the rate charged) may depend on whether the consumer's and card's data is processed electronically from the magnetic strip on the back of the card, manually by the merchant based on the information set forth on the card, or manually by the merchant based on information provided by the consumer over the telephone. In short, the number and complexity of these categories make it difficult for a merchant to adequately track or reduce their interchange-category fees.
The effect of these interchange categories is also difficult to track because of the sheer number of transactions received by merchants; some merchants receive hundreds of thousands of transactions a month. Merchants simply do not have the extraordinary manpower or expertise often needed to audit these transactions or figure out how to change transactions from an expensive category to a less-expensive category.
Further still, merchant processors—the companies that have good information about categories and fees—often have no incentive to help merchants track and reduce these fees; most merchant processors make no more money by providing details about these complexities than not doing so.